GLOBAL ECONOMY-Asia's factories show signs of revival, but exports sluggish

Kim Coghill

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SINGAPORE, Jan 2 (Reuters) - Manufacturing activity in Asia expanded in December as China’s economy showed signs of revival but export demand was uneven, pointing to further sluggish growth for the region, business surveys suggest.

Private and official manufacturing surveys added to evidence that China’s economy picked up late in the year, while activity in India expanded at its strongest pace in six months in December, boosted by strong factory output and a spike in new orders.

Similar reports on Wednesday also showed activity increased in South Korea and Taiwan for the first time since May.

But while domestic orders showed some improvement, export orders were decidedly mixed, pointing to continued weakness in global demand with Europe mired in recession and fears of tighter fiscal policy clouding recovery prospects in the United States.

South Korean exports unexpectedly fell in December, according to data on Tuesday, highlighting that any recovery for export-reliant Asian economies is likely to be patchy and slow.

“Asia is gradually improving, but the region, including China, remains largely exposed to exports and without signs of improvement in the U.S. and Europe it will be hard for activity to take off,” said Frederic Neumann, co-head of Asian economics at HSBC.

Later on Wednesday, similar surveys are expected to indicate the euro zone recession likely deepened in the fourth quarter while U.S. ISM manufacturing in December was expected to modestly expand.

MORE CLIFFS AHEAD

A last-minute deal in Washington to avoid steep tax hikes and spending cuts from Jan. 1 may not remove an expected drag on the world’s largest economy, Neumann added, noting that more heated political battles over U.S. fiscal policy were likely in coming months.

“We have a triple ‘fiscal cliff’ coming up in March,” Neumann said, referring to talks over the U.S. debt ceiling and other upcoming budget battles.

“We will probably only get clarity on the outlook for the year by the second quarter,” he said, adding the Chinese New Year holidays early in the year also tended to distort trade and production patterns.

The U.S. economy will remain sluggish in 2013, underscoring the very fragile world economic outlook, while chances of a recovery in the euro zone have faded further, Reuters polls show.

CHINA

For Asia, much hinges on the pace and quality of the recovery in China as a new generation of leaders prepares to take charge.

The official China manufacturing purchasing managers’ index (PMI) released on Tuesday held steady in December at 50.6, matching November’s seven-month high, though growth in new orders was unchanged and the pace of output softened marginally.

A similar survey by HSBC released a day earlier, which focuses more on smaller and mid-sized firms, suggested activity was at its strongest since May 2011.

Together the surveys support a growing consensus that economic activity in China picked up during October to December -- after GDP growth had slowed for seven consecutive quarters to 7.4 percent in the third quarter -- partially offsetting persistent weakness in Europe and Japan.

“Both surveys are back above 50 (indicating expansion), which is reassuring but not pointing to a return to the kind of heady growth that China has seen before,” Neumann said.

“We really need Chinese consumers to step up.”

Most analysts and academics agree China needs to transform its growth model to allow consumption, not exports and investment, to drive activity. But there is no clear agreement on how or when China can pursue such changes.

Soon-to-be-retired President Hu Jintao promised in a new year address that reform of China’s economic growth model would be a crucial theme this year, without giving further details.

MIXED SIGNALS

In India, Asia’s third-largest economy, the HSBC Markit Manufacturing PMI, which gauges the business activity of the country’s factories but not its utilities, jumped to 54.7 in December from 53.7 in November, its biggest monthly rise since January 2012.

India’s central bank is widely expected to cut interest rates as early as this month if inflation continues to cool, shifting its focus towards boosting the economy.

A similar survey on South Korea’s manufacturing sector edged up to 50.08 in December from 48.16 in November. It was the first time since May that the index stood above the 50-point mark that separates growth from contraction.

Sub-indexes for overall output and new orders were marginally above 50, driven by new product launches that met domestic demand. But the new export orders sub-index fell to 48.86 in December, marking the seventh month of contraction as overseas consumer sentiment wilted.

Activity in Southeast Asia’s largest economy, Indonesia, also expanded but at a slower rate, as growth of new export orders eased from a month earlier.

Business sentiment among Asia’s top companies improved slightly in the fourth quarter, reversing two consecutive quarters of declines, while global economic uncertainty remained the biggest concern for the region’s firms, a recent Thomson Reuters/INSEAD survey showed.